ERISA’s Fiduciary Duties Can Exceed Statutory Disclosure RequirementsPublications - Newsletter, Article | December 17, 2021
ERISA’s Fiduciary Duties Can Exceed Statutory Disclosure Requirements
Employee benefit plan fiduciaries understand that ERISA requires them to act “with the care, skill, prudence, and diligence” of a prudent “expert,” which includes making certain disclosures to the participants in their plan. However, this standard may require more than simply meeting the statutory minimums outlined in ERISA or the Internal Revenue Code, after consideration of all relevant facts and circumstances,
Several distinct categories give rise to disclosure-related fiduciary duties: (1) statutory disclosures; (2) direct inquiries by participants or beneficiaries; (3) circumstances when silence would be harmful to the participant; and (4) impending changes to benefit plans that are under serious consideration. This article summarizes these categories and how fiduciaries can best protect themselves from ERISA claims of breaching fiduciary duties.
Statutory Disclosure Requirements
Plan fiduciaries owe myriad disclosure obligations to participants and beneficiaries, such as distributing summary plan descriptions (“SPDs”), summaries of material modifications (“SMMs”), periodic benefits statements, plan fees and investment notices, and requested plan documents.
Statutory disclosures are among the most straightforward obligations since explicit delivery and timing procedures are outlined in Labor and Treasury regulations. Fiduciaries encounter issues with statutory requirements when disclosures are not timely distributed, are not written in a manner to be understood by average participants, and are not delivered due to administrative issues. System failures and technical deficiencies can elicit statutory penalties under ERISA, additional taxes, and steep litigation costs.
Participant Requests for Information
The next category of disclosure-related fiduciary duties stems from participants inquiring about their benefits under an ERISA plan. When a participant specifically requests information, fiduciaries are held to an elevated standard: the fiduciary must provide complete and accurate information concerning the information requested, all in a timely fashion.
In Eddy v. Colonial Life Ins., the employer, Unitag, terminated the company’s group health plan. As a result Mr. Eddy asked Colonial Life, the insurance company, about the status of his insurance coverage. The Colonial Life agent essentially told Mr. Eddy that he had no options, but it turned out that there was an option to convert the employer’s group policy into an individual policy. In holding that Colonial Life breached its fiduciary duty to Mr. Eddy, the D.C. Circuit explained that the insurance company had to do more than not misinform. Rather, it had an affirmative obligation to inform Mr. Eddy about his insurance status and his conversion options.
Eddy and similar cases illustrate that when a participant explicitly asks about the status of his or her coverage, fiduciaries must be timely, accurate and thorough.
Substantial Likelihood That Silence Would Be Harmful
The third situation leading to enhanced fiduciary duties is when there is a substantial likelihood that silence would be harmful. In jurisdictions that recognize this duty, it emerges regardless of whether the participant asks about his or her benefits.
Harmful silence situations include ambiguous plan documents or administrative practices. In Estate of Foster v. American Marine SVS Group Benefit Plan, the Ninth Circuit held that an employer failed to provide a life insurance participant with adequate notice of his right to convert a group policy into an individual policy. The SPD did not clearly indicate whether the participant’s 31-day conversion period began on February 29 (month he was laid off), April 30 (month he stopped receiving pay), or a later date based on an exception for participants who were totally disabled. The employer had a duty to provide more complete information concerning the participant’s conversion rights since the SPD was not entirely clear about when the life insurance policy would terminate.
The Ninth Circuit warned that sending an SPD can be sufficient but is not always enough. The critical inquiry is whether in a particular circumstance the employer has done enough “to provide complete and accurate information.”
Serious Consideration Doctrine
Finally, an enhanced fiduciary duty commences when an employer gives serious consideration to plan changes. Amending or terminating a plan is a settlor function, not a fiduciary function, but conveying information to participants about future plan benefits does entail a fiduciary act. While employers have a business interest in protecting future business plans (and plan design changes) from premature disclosure, employees also have a right to disclosures relating to their benefit plans.
Under the Third Circuit’s widely adopted test, a plan change is under serious consideration when (1) a specific proposal (2) is being discussed for the purposes of implementation (3) by senior management with authority to implement the change. When this occurs, fiduciaries may have the affirmative duty to inform impacted participants about the possible plan change.
Consequences of Failing To Provide the Foregoing Disclosures
If a plaintiff succeeds in a breach of fiduciary duty lawsuit arising from a disclosure failure, the remedy will likely be “appropriate equitable relief.” Appropriate equitable relief can include money damages imposed on the breaching fiduciary (including personal liability). In light of various circumstances that require heightened duties, fiduciaries must be mindful of falling into one of these categories when communicating with participants.
If you have further questions about the disclosure requirements imposed on plan fiduciaries, please reach out to a member of the Kutak Rock Employee Benefits and Executive Compensation practice group.